A Study in Price Projection

You’ve probably heard the statement, "No one knows where prices are going, and if someone tells you they do, they are misleading." Often the statement originates with someone who has missed a big move, which means he or she is largely unsold and unprotected. Due diligence is required to understand basic tenants of price discovery.

Usage in 2012 was roughly 12.1 billion bushels. Fortu­nately for long-term demand preservation, substitutions and new competition filled a global demand that we could not. U.S. corn exports dropped in half to 731 million bushels. Fewer planted acres in 2013 of 95.4 million (87.7 harvested) meant we only needed an average yield of 138 bu. per acre to equal demand at $7 per bushel and still have 800 million bushels left over. When USDA projected a 14 billion bushel crop, prices fell seeking a level that would rebuild demand, which USDA also predicted would happen but at $4.50, not $7.

As cash prices broke below $4, fear ruled that more downside was to come. The market understood that sub-$4.50 futures would beget even more demand. For fear of a bearish Jan. 10 stock report, continued selling put the bottom in the market (see chart). Successfully managing price risk, or marketing as we know it, is complicated; there is no such thing as a one-size-fits-all solution.

Markets often recover a percentage of losses. The most often used recovery targets are 38%, 50% and 62%. The mid-June high brought selling pressure with the realization that supply would significantly exceed previous year’s usage. The massive Jan. 10 reversal on a friendly report saw prices languish through the end of January as producers sold on advice to reward the gift of a rally off the bottom. The market absorbed the selling, responding with still higher prices to fill empty pipelines with prices blowing through the 38% retracement to 50%.

At press time, prices have turned back from the 50% retracement level and remain supported in a sideways fashion, buying time, information and price action while relieving the overbought condition. Basis fell apart as domestic pipelines were filled and as logistics problems mount in the Northern Plains.

A close more than $5.06½ July futures opens the door to the 61.8% recovery; a bullish March 31 stocks and planted acres survey would be suppor­tive. Beyond that, a spring weather situation could be the catalyst for total recovery near $6 one year after it all began. There is a lot we can do with $4 corn, especially with reliability plaguing Argentina, Russia and Ukraine.

Optimism was rampant for new crop prices in early summer 2013. The rest is history as prices bottomed Jan. 10 on a bullish USDA stocks report, making previous selling or buying put options worthless. Source: Gulke Group

Jerry Gulke farms in Illinois and North Dakota and ispresident of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, send an email to info@gulkegroup.com or call (707) 365-0601. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.